EUR 850.00 For Business Accounts Only

Morningstar | Resilient Renovation Expenditure to Buoy Narrow-Moat Dulux in Fiscal 2018; FVE Unchanged

With narrow-moat Dulux to report its full-year fiscal 2018 result in November, we still expect mid-single-digit EPS growth on average during the next three years. Accordingly, we retain our AUD 7.50 per share fair value estimate. With Dulux shares currently trading at a 5% premium to our valuation, we still view the stock as fully valued. An attractive characteristic is the resilience of Dulux’s earnings, which are less challenged by the ebbs and flows of the construction cycle, with revenue more closely associated with relatively stable residential addition and alteration, or A&A, spending. We therefore still expect resilient A&A activity to support Dulux’s top line over the medium term.

We remain positive on the outlook for A&A expenditure, and we forecast market volume to grow by approximately 2% per year over the coming decade. Volume growth, in tandem with modest price increases, along with continued market share gains (which were particularly strong in the first half of fiscal 2018), translates into expectations for top-line growth of over 5% per year for the next five years in Dulux’s core paint and coatings segment, which accounts for the bulk of group earnings. We expect the company to increase its share of the decorative paint market by around 50 basis points per year, reaching an impressive 50% by fiscal 2022. The expected market share gains are likely to be supported by Dulux's highly successful partnership with Bunnings. The hardware chain will continue consolidating the fragmented hardware space. With its dominant shelf space in Bunnings' stores and continued reinvestment into brands and product innovation, Dulux is well placed to benefit.

We project EBITDA margins in the paint segment to increase by around 50 basis points to almost 20% during the next five years through a combination of cost savings, scale, and mix shift towards premium product. The company should extract cost efficiencies via the new Merrifield paint factory, although in the near term, this will be partially offset by higher depreciation. Pleasingly, the project is tracking to schedule and within the AUD 165 million budget.

The garage door and openers segment will experience slower sales growth, given greater exposure to new residential construction activities, which are likely to trend lower from the current cyclical peak. Accordingly, we expect the segment to grow at a low-single-digit pace during the next five years.